In my previous write-up for The Daily Star, dated August 16, I discussed the credibility of some of the arguments that called for a reduction in the yield of national savings schemes (NSS), focusing particularly on banking sector issues, monetary policy and the government’s fiscal challenges.
One common discourse in the financial and policy arena of Bangladesh is the idea that higher rate on national savings schemes discourages investment in the stock market. Some experts claim that the attractiveness of NSS is creating lazy “savers” and lowering “investment” in the stock market. The end result is apparently money flowing from stocks to NSS. Let us assess this claim objectively.
First, let’s recall that from a macroeconomic perspective, money held in domestic financial assets is, by definition, an investment in the domestic economy. It does not matter if it’s in stocks or NSS. An investor putting money in suppose, an initial public offering, is essentially contributing capital to a corporation. This is presumably used for business expansion with the goal of higher profits (leading to higher stock prices), generating higher employment. While an NSS investor is lending money to the government for public sector projects like new infrastructure which involves importing capital machineries, employing labour, etc. In either case, capital from the saver is engaged in some form of economic activity, while the saver makes a profit/yield. From a strictly economic sense, only money stuffed under mattresses or pillows could be considered lying idle.
So is investment in NSS getting in the way of investment in stocks? In theory, this claim is certainly plausible. Higher return from fixed-income instruments has a negative impact on stock prices. But this idea relies heavily on several assumptions. For instance, if both markets have similar levels of liquidity, quality of securities, consistency of regulatory support, then one could make a credible argument that higher yield from NSS significantly discourages investment in stocks.
No one needs reminding that the stock market in Bangladesh lacks both liquid and quality stocks. Regulatory support has traditionally been patchy, particularly in terms of generating investor confidence. If the market were able to list a higher number of multinational corporations, or domestic corporations with a reputation for good governance, an ordinary citizen would be more confident in investing in stocks in the medium to long-term. But that has not happened simply because big private corporations view the cost of getting listed in the stock market to be far greater than the gains. Regulators have not been able to change that perception. And while some may argue that the market has turned the corner and better times lie ahead, investor confidence is still dented by the memories of 2010.
True, investors have high expected rate of return from the stock market, perhaps in excess of 15 percent! So it is easy to claim that a rational investor will not go to the stock market for 11-12 percent return if he can earn the same from NSS. Yet, reducing NSS rates to, let’s say, 6-7 percent will not necessarily reduce investors’ expected rate of return from the stock market. That will only happen if an investor believes stock prices will exhibit more stability/less volatility than in the past. For instance, consider a father who is saving in NSS for his child’s future education, marriage, etc. Given the general lack of trust in our stock market, would he invest that saving in stocks if NSS yield was lowered?
On the other hand, suppose the government is making visible improvements in infrastructure, stimulating private investment and generating quality jobs. The stock market would be benefitted both directly and indirectly. Stocks of firms directly involved in infrastructure and/or manufacturing projects would become more attractive to the public. And better jobs mean higher disposable income, giving citizens more freedom to invest in stocks with their savings.
So it isn’t NSS which is necessarily getting in the way of greater stock investment. Rather, the market’s mediocre condition itself is the reason compelling people to think of alternatives.
Be that as it may, one could still make the claim that money is flowing from stocks to NSS. But if that were to be the case, one would expect general stock indices to fall as demand shifts to NSS from stocks. And yet the general DSEX index from, let’s say first week of January 2016 to August 2017, rose by over 25 percent! There were no reductions in NSS rates during this period. So why did money flow in (instead of flowing out) given the high NSS returns?
Alternatively the period from early 2012—when NSS rates were increased—to late 2015 was characterised by long episodes of largely “flat” trends in the general market index, with occasional blips in both direction. In other words, while the market may not have lured in more money, it certainly did not lose money to fixed-income instruments like NSS at any significant level. Obviously not, because money has been flowing in to NSS from the banking sector, not the stock market as everyone knows all too well.
What becomes apparent is that the relationship between investment in NSS and in stocks is quite weak in Bangladesh. So without addressing the shortcomings in the stock market, slashing rates on NSS is unlikely to see large inflows into our public bourse. The “high-NSS-yield” argument can be used as a scapegoat to justify lack of participation in the stock market, but it will not accomplish anything else.
Sharjil Haque is a PhD student in economics at the University of North Carolina, and former research analyst, International Monetary Fund, Washington DC.
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